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DividendMax - Latest Dividend Research 04-12-2013

Investment Tools Ltd.
DividendMax - Latest Dividend Research 04-12-2013

Dividend Research – Easyjet flying high

This week we are going to narrow our horizons and have a look at what we thought would be a single sector. We are going to examine the travel and leisure sector globally. Sometimes as I come to write a column I have a particular stock in mind and this is true of this week. So, our initial selection is for the travel and Leisure sector globally. We use the optimizer to select all of the stocks that we cover by clicking the ‘show details’ and selecting all yields, all market caps, all dividend cover, any CADI, any FDI, all indices and travel and leisure in the sectors dropdown list. We then select global in the regions button. This gives us 26 stocks covered by DividendMax. It is a little bit annoying that sector classifications do not seem to be consistent and we find that Deutsche Lufthansa and Boeing are in a different sector to Easyjet. I do wish that somebody could sort this out! I don’t think Dividendmax is able to do this, but for the purpose of this analysis, we will look at those two stocks as the target that I alluded to earlier is in fact Easyjet.

So, as a result of our sector search we have Air France, Easyjet and Aeroports de Paris in the travel and leisure sector with Deutsche Lufthansa and Boeing in the aerospace and defence sector. Thinking this through further, I wondered where Ferrovial were and found them in the commercial transportation sector. Messy!

So, back to the travel and leisure sector and we need to chop down the 26 companies to a manageable level for our long list. Let’s start with dividend cover and go for a solid ‘more than 2’. Additionally, go for an annualised yield of over 3%. This gives us a right hotchpotch of companies and I am happy to list them out:

Marstons, Tui travel, National Express, William Hill, Compass Group, 888 holdings, Easyjet, Millenium & Copthorn, Aeroports de Paris, Rank Group, Intercontinental Hotels and Mattel from the US.

Next, we apply the same criteria to the Aerospace and defence sector and we get:

BAE systems, Chemring, Deutsche Lufthansa, Cobham, Lockheed Martin, Meggit, Raytheon, and General Dynamics corporation.

Finally, we apply to the commercial transportation sector and we get CH Robinson Worldwide with Ferrovial eliminated on the grounds of low dividend cover.

We are still left with 21 stocks and need to apply further criteria to give us our long list. Given that what we are really interested in is the travel / holiday industry I am going to manually eliminate Marstons, William Hill, Compass, 888 holdings, Rank Group, Mattel, BAE systems, Chemring, Cobham, Meggitt, Millenium & Copthorn, Intercontinental Hotels, Raytheon and General Dynamics to leave us with the long list:

Tui travel, National Express, Easyjet, Aeroports de Paris, Millenium & Copthorn hotels, intercontinental Hotels, Deutsche Lufthansa, Lockheed Martin and CH Robinson.

At this point we can look at the fundamentals:

Company

Forward P/E Ratio

Dividend Cover

Annualised yield

Tui Travel

12.6

2.2

4.99%

National Express

12.3

2.1

4.64%

Easyjet

13.4

3.1

3.94%

Aeroport de Paris

19.0

2.0

3.69%

Deutsche Lufthansa

19.4

3.7

4.68%

Millenium & Copthorn Hotels

18.1

2.3

3.8%

Intercontinental Hotels

19.9

2.1

3.24%

CH Robinson

21.5

2.1

3.81%

Lockheed Martin

14.7

2.0

3.68%

We can immediately eliminate Aeroport De Paris, Millenium & Copthorn, Intercontinental Hotels and CH Robinson as they are just too expensive. In none of the cases is the price earnings ratio justified by the prospective earnings growth.

Tui Travel has a very good track record of increasing its dividend although it has struggled with relatively small increases over the past three years. The price earnings ratio of 12.6 and decent yield with forecast earnings growth of 13% makes it a contender and it makes the short list.

National Express is recovering from a painful year in 2009 and is on the recovery trail, but the fundamentals do not stack up against Tui and is eliminated at this stage.

Easyjet is performing extremely strongly and its recent final results were blow-away. Easily makes the final cut. Deutsche Lufthansa makes the cut in order to make for us to make a good comparison with Easyjet.

Lockheed Martin, although in the under pressure defence sector with 80% of its business with the US defence department and other US government agencies makes the cut purely on the strength of its excellent dividend history. Its shrinking dividend cover is however a worry, but is still solid at 2.0.

Let’s have a look at the dividends paid by each company over the past 6 years:

Tui Travel

Year

Dividend in Pence

% Growth

2006

6.33

 

2007

8.4

32.7%

2008

9.7

15.5%

2009

10.7

10.3%

2010

11.0

2.8%

2011

11.3

2.7%

2012

11.7

3.5%

Easyjet

Year

Dividend in Pence

% Growth

2006

0.0p

 

2007

0.0p

0%

2008

0.0p

0%

2009

0.0p

0%

2010

0.0p

0%

2011

10.5p

100%

2012

21.5p

104.8%

2013

33.5p

55.8%

 

Deutsche Luftansa

Year

Dividend in cents

% Growth

2006

70.0c

 

2007

125.0c

78.6%

2008

70.0c

(44%)

2009

0.0c

(100.0)

2010

60.0c

100.0%

2011

25.0c

(58.3%)

2012

0.0c

(100.0%)

 

Lockheed Martin

Year

Dividend in cents (U.S)

% Growth

2006

125.0c

 

2007

147.0c

17.6%

2008

183.0c

24.5%

2009

234.0c

27.9%

2010

264.0c

12.8%

2011

325.0c

23.1%

2012

415.0c

27.7%

2013

478.0c

15.2%

 

I know some hedge fund guys and one of them told me to have a look at Lufthansa. You have got to be joking. Sure, they might have a good year in 2013/14, but look at that recent record, totally unacceptable for DividendMax and no doubt our followers. You do not know what income you will get from one year to the next. As we stated earlier, it makes for a good comparison with Easyjet and we have no hesitation at all with eliminating Lufthansa on this basis.

So this leaves Tui Travel, Easyjet and Lockheed Martin and the Luton rivalry between two of its biggest employers is won by Easyjet, hands down. To its credit, Tui, in a very very difficult period has almost doubled its dividend from 2006 to date, whilst its competitors have had to recapitalise, have stopped paying dividends and really could have gone bust in many cases, but for supportive investors. So, investors should not run scared of Tui. It has performed very well during a very difficult time for the global economy.

Lockheed Martin is the pick of the bunch from a dividend track record. The dividend is up almost 300% from 2006 to 2013 and if you fancy any stock for a portfolio that needs a defence / aviation stock, this company is far superior to BAE systems of the U.K. and there isn’t any reason to think it will stop. Analyst’s forecasts predict more of the same and we believe them. If you run a diversified global portfolio of large caps, this is your defence stock.

Now, to our pick which is Easyjet! It only started paying dividends in 2011 after a solid growth phase. So many people make the mistake of thinking that the life of a growth stock is over as soon as they start to pay dividends. Whilst true in some cases, we do not believe that this is the case with Easyjet. The shares were badly beaten a few years ago by the markets, but this is a stock that truly shows how wrong markets can be. It fell from a high of almost £8 in April 2007 to £2.66 in July 2008 and was still only £3.38 in September 2011. But look at what they did through those years. Even though they recovered profits to above the 2007 level by 2011, the share price was less than half the 2007 price.

Year Ending

Revenue (£m)

Pre tax profit (£m)

Earnings per share (p)

30/09/07

1797.2

201.9

34.8

30/09/08

2363.0

110.2

19.8

30/09/09

2666.8

54.7

16.9

30/09/10

2973.0

154.0

28.4

30/09/11

3452.0

248.0

52.5

30/09/12

3854.0

317.0

62.5

30/09/13

4258.0

478.0

103.3

In my view, Easyjet is a truly remarkable story and would be my airline stock of choice globally bar none. They have recently declared a final dividend of 33.5p per share, up almost 56% on last year’s dividend. Not stopping there, they have declared a special dividend of 44.1p per share, with both going ex-dividend on the 26th February. Against the current share price of 1396p that is a stonking 5.6%. Will it be a one-off? We doubt it. Dividend cover is well over 3 times and cash generation is incredibly strong. The current dividend policy of paying out one third of annual profits after tax leaves plenty of scope for a more generous dividend policy or we will continue to see more and more special dividends. Alternatively gearing will disappear as it reduced from 29% in 2012 to 7% in 2013. They also have £1237 million of cash in the bank leaving them with net debt of £156 million.

For once, we are at one with the brokers who, out of 23 recommendations, 15 say strong buy.

In our view, a great deal is going well at Easyjet and we believe the current rating undervalues the business and its prospects. Add to this the very sound expectation of solid dividend growth and the 77.6p coming to shareholders early next year and it makes a very strong investment case.

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